Hartford Says Goodbye to Annuities

Bowing to pressure from hedge-fund titan John Paulson, Hartford Financial Services Group Inc. said Wednesday it would exit its annuity business and weigh a sale of a large portion of its life-insurance operation. (Photo: TIM SLOAN/AFP/Getty Images)

By

Erik Holm,

Leslie Scism and

Gina Chon

Updated March 21, 2012 6:54 p.m. ET

ENLARGE

John Paulson
Bloomberg News

Hartford Financial Services Group
Inc.
on Wednesday unveiled plans for a radical overhaul of its business in an effort to revive its share price and satisfy demands by the hedge-fund manager
John Paulson
for "drastic" change at the 200-year-old insurer.

Hartford said it would stop selling variable annuities, the retirement-savings product the company had helped revolutionize, and put its life-insurance arm up for sale to focus on its property-and-casualty insurance business. The surprise announcement comes less than two months after Mr. Paulson, whose firm, Paulson & Co., is Hartford's largest shareholder, demanded executives "do something drastic" to stem a slide in the stock price.

Liam McGee,
Hartford's chief executive, said Wednesday the initiatives would allow the company to focus on property-and-casualty insurance, employee benefits and mutual funds. Together, the three operations are targeting a return on equity of 12% to 13% this year, Mr. McGee said. Most U.S. insurers aspire to double-digit returns

The plans didn't satisfy Mr. Paulson, whose bets against subprime mortgages just before the U.S. housing market's collapse yielded billions of dollars in profits for his investors.

ENLARGE

Hartford Financial, led by Liam McGee, announced plans to stop selling variable annuities and try to sell part of its life-insurance business.
Bloomberg News

"We support today's actions, not as a conclusion of the strategic review, but as a first step in creating a clear delineation between The Hartford's P&C and non-P&C businesses," Mr. Paulson's firm, which holds 37,540,676 shares, or about 8.5% of the insurer's stock, said in a statement. "While we appreciate the extensive work of The Hartford's board and management, we do not believe the positive actions announced today address the main problem with The Hartford's undervaluation."

Hartford's main problem, the firm wrote, remains a "lack of interest from P&C analysts and P&C investors in Hartford's best-in-class P&C business due to its affiliation with unrelated, low-return and complex businesses" such as annuities.

"We do not believe today's actions will materially increase P&C investor interest in The Hartford," the hedge fund said.

The shares jumped 7.1% in morning trading before closing 1.4% higher at $22.02. Hartford trades at less than half its per-share book value, or assets minus liabilities, a discount to many of its fellow U.S. insurers.

Mr. McGee played down Mr. Paulson's role in nudging Hartford toward what stands as a substantial about-face. Hartford had long resisted calls to separate its property-casualty arm from life insurance.

"This was Hartford's decision," Mr. McGee said in an interview. "We appreciate the constructive suggestions of all of our shareholders, including Paulson."

Nevertheless, people familiar with the matter acknowledge Mr. Paulson's campaign helped force the issue for Hartford, providing the insurer with an impetus to act now.

Hartford has struggled to recover from a global credit crisis that rattled the company and exposed weaknesses in the way it had hedged against risks at its variable-annuity business; it was one of three insurers to take federal bailout money, since repaid.

In the spring of 2011, a year after it completed its stock sale to repay the government, Hartford assessed what its business mix should be if interest rates remained near historic lows and the company eventually decided it would be best to explore a sale of much of the life-insurance business, the people said.

By mid-2011, Hartford executives concluded it needed a bolder plan to persuade more of those shareholders that the company would make a full recovery. It appointed
Goldman Sachs Group
Inc.
and Greenhill Inc., to study its strategy and come up with a plan to turn around the stock, people familiar with the matter said.

Earlier this month, Mr. Paulson shared more details of his suggestions for Hartford, including a plan to spin off what the money manager considered the company's "crown jewel": property and casualty insurance.

Hartford has argued that such a split would fail to win regulatory approval. Indeed, any transaction that would separate the cash-generating property and casualty arm from a life-and-annuities business that could require additional reserves would be viewed "with a jaundiced eye," said
Thomas Sullivan,
who resigned at Connecticut's insurance commissioner in November 2010. "That's always the question before regulators, 'how do I best protect the consuming public?'" Mr. Sullivan said.

Hartford's bankers will now pursue "strategic alternatives" for the company's individual-life business, one of the 10 biggest in the U.S. as measured by annual premiums. It also will look to sell its broker-dealer, Woodbury Financial Services, and its retirement-plans unit, which has $52.3 billion under management and is a prominent seller of 401(k) and other employee retirement-savings programs.

The sales process is in early stages and the business hasn't been marketed yet, people familiar with the matter said. Hartford attracted interest from possible suitors in 2009 and some of those companies could also be interested in the life-insurance business, the people added. Given the asset-management aspect of life insurance, private equity and hedge funds also could play a role, the people said.

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